Fuel margins among analysts’ concerns

CST unveiled the Corner Store Market brand, which focused on fresh food and groceries, in November 2015.

CST unveiled the Corner Store Market brand, which focused on fresh...

CST Brands Inc., the San Antonio convenience store chain that’s the target of a bidding war, is expected to announce a 34 percent pop in profit when it releases its second-quarter results Friday, stock analysts say.

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The company is projected to have earned $33.5 million, or 43 cents per share, during the three months ended June 30, up from $25 million in profit, or 32 cents per share, during the same period in 2015, according to average estimates from analysts polled by Bloomberg.

But analysts are less optimistic about the company’s fortunes than they were just a month ago, reducing their earnings-per-share estimates by 10.2 percent over the past four weeks.

Jefferies analyst Christopher Mandeville initially predicted earnings per share to hit 49 cents but dropped that estimate to 34 cents on expectations that CST’s profit margins on fuel were squeezed as crude prices rose during the quarter.

Crude prices have seesawed after bottoming out at around $26 a barrel in February. Crude closed at $40.83 a barrel Wednesday but has tumbled more than 20 percent from its June peak. Economists say oil is now in a bear market, ending a recovery that saw prices almost double from its 12-year low in February.

CST’s stock rose in June on news that the foreign owners of 7-Eleven and Canada’s Alimentation Couche-Tard Inc., Circle K’s parent company, offered takeover bids for CST. Reuters reported that a consortium of private equity firms including Blackstone Group and Apollo Capital Management also offered to buy the company, which is reportedly considering another round of offers before deciding whether to sell.

Other possible buyers for CST include Japanese convenience store chain Lawson Inc. and Ohio-based companies Marathon Petroleum Corp. and TravelCenters of America, Herzog said in a research note.

CST is weighing the sale as it works to reduce its liabilities built up to make multiple acquisitions since it broke off from Valero Energy Corp. in 2013. S&P Global Ratings warned CST earlier this year that the company’s growing debt, which hit $1.32 billion at the end of the first quarter, put its credit rating at risk of a downgrade.

In February, the company acquired $300 million of fresh debt when it purchased Flash Foods, a Georgia-based convenience store chain with 165 stores. CST sought to offset that debt by selling its 76 stores in California and three in Wyoming to 7-Eleven for $408 million in July.

CST also hopes to grow in-store sales through its new Corner Store Market brand, a concept announced in November that focuses on fresh food and groceries over fuel. CST wants 30 percent of its existing stores to convert to the market format, and sales of groceries and freshly prepared food offerings to make up about 70 percent of its gross margin revenue by 2020.

The push toward merchandise appeared to pay off when CST reported $160 million in gross profit from sales of merchandise and services during the first quarter of this year, up 21.2 percent from $132 million during the same time last year. During the same period, gross profit for fuel sales rose by just 6.2 percent to $120 million from $113 million in 2015.